Article excerpt

China's recent growth experience has resulted from its incorporation of local knowledge into their reforms and adept handling of the unintended consequences of the reforms. The first wave of reforms occurred in the agricultural sector and incorporated local knowledge. Their success led to some unintended consequences- the inter-provincial cotton price wars and the rise of corruption- that threatened continued reforms. In response, the Communist Party chose to shift ideology rather than re-intervene in the economy. Thus, it avoided the adverse consequences of sustained intervention.

JEL Codes: P21, P31, P32, Q18.

Keywords: China, Economic Reform, Political Economy, Ideology.

INTRODUCTION

China's transition to a market economy began in 1978 when the Third Plenum of the Eleventh Chinese Communist Party Congress sided with Deng Xiaoping's pro-reform faction. The Party shifted its focus from 'class struggle' to economic development. The first wave of reforms focused on the agricultural sector. In 1979, the government increased grain procurement prices and decreased agricultural input prices. In response, agricultural productivity increased and per capita grain production increased from 319 kilograms to 400 kilograms from 1979 to 1984. Along with the rural reforms, the Party began to use market-based prices for resource allocation and increased China's openness to international trade in the coastal provinces in order to provide the incentives for increased production.

A second wave of reforms began in 1984 and lasted until 1988. The second stage continued to promote international openness and formally adopted the dual track approach to market liberalization. Two sets of prices- market-based and plan-based-allocated resources. The plan-based prices allowed the Material Supply Bureau to purchase output at state determined prices through quotas. The market-based prices determined the allocation of output that exceeded the plan's quota. These prices were based on consumer valuations. The dual track protected the potential losers of full price liberalization from experiencing losses. It appeared to be a reform without losers (Lau, Qian, and Roland 2000).

Reform stagnated from 1988 through 1992 as anti-reform leaders gained prominence. Deng Xiaoping, who led the reforms, retired in 1989. Anti-reform politicians, led by Chen Yun, took over the party. They blamed the unintended results of the reforms- the rise in corruption and the inter-provincial price wars- on the use of the market. They offered a program of increased interventions into the economy as a way to control the unintended consequences of the reforms. The Party could have accepted these proposals and shifted China to a planned economy once again. The proposals were not accepted and since 1992, reforms have continued to push China towards greater reliance on markets and economic development has continued.

The debate over the sources of China's recent reform experience can be divided into two camps. The first is the convergence school that focuses on China's institutional convergence with non-socialist market economies (Sachs and Woo 2000). This interpretation stresses big bang approach to China's major reforms and the gradual adoption of standard economic policy prescriptions for the transition to a market economy. The second is the experimentalist school that focuses on the gradualism of the reform and the non-traditional approaches to reforms that include the dual-track pricing system (Naughton 1995).

Our approach combines insights from both schools. We agree with the convergence school that China's long-run success requires the development of institutions that are compatible with developed market economies. Without them, transaction costs increase and the gains from trade go unrealized. But we also agree with the experimentalist school that the non-traditional reforms have complemented traditional reforms so as to promote economic growth and legitimize some of the reforms. …

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